The GBP’s recent decline has been dramatic. Wider deficits and bigger debt burdens need to be financed by foreign inflows – which may require further FX adjustment, according to economists at HSBC.
UK’s structural concerns dominate.“The UK’s public finance position (in terms of relative debt dynamics) is going to worsen materially in the year ahead. The GBP does not enjoy any special privilege in terms of financing this burden.”
“The UK’s core balance has seen a large decline from a 2% of GDP surplus to an 8% of GDP deficit in the last two years (Bloomberg, 30 June 2022). This requires greater short-term capital inflows just to keep the GBP on an even keel.”
“If foreign investors fear an unsustainable debt burden being ‘paid for’ through inflation or FX depreciation, they may not be as willing to finance it in the first place. This points to the potential for an ever weaker currency valuation.”
EUR/USD advances beyond 0.9600 amid renewed dollar weakness
EUR/USD has gathered bullish momentum and advanced to a fresh daily high above 0.9600 in the early American session on Wednesday. The renewed selling pressure surrounding the greenback amid improving market mood seems to be fueling the pair’s rebound.
GBP/USD extends recovery toward 1.0700 in volatile session
Following an initial spike to 1.0850 on BoE’s intervention in gilt markets, GBP/USD lost nearly 300 pips. With the dollar losing its strength after Wall Street’s opening bell, however, the pair rose toward 1.0700 and erased a large portion of its daily losses.
Gold rebounds above $1,650 as US yields retreat
Gold gathered bullish momentum and recovered above $1,650 from the multi-year-low it touched at $1,615. The benchmark 10-year US Treasury bond yield is down over 2% on the day following the BoE’s intervention in the gilt market, helping XAU/USD stretch higher.